TY - CHAP

T1 - How Oligopolies May Improve Consumers’ Welfare? R&D Is No Longer Required!

AU - Sidorov, Alexander

PY - 2019/1/1

Y1 - 2019/1/1

N2 - The paper studies how the industry concentration affects the Social welfare, which is measured as consumer’s indirect utility. Schumpeterian hypothesis tells that the harmful effect of oligopolization may be offset by positive externalities of concentration, such as innovations in technologies, R&D, etc. This contradicts to traditional neoliberal paradigm, which insists that concentration is always harmful for the end consumers. We study a general equilibrium model with two types of firms and imperfect price competition. Firms of the first type are monopolistic competitors with negligible impact to market statistics, subjected to typical assumptions, e.g., free entry until zero-profit cut-off. Unlike this, the firms of second type assumed to have non-zero impact to market statistics, in particular, to consumer’s income via distribution of non-zero profit across consumers-shareholders. Moreover, these large firms (oligopolies) allow for dependence of profits on their strategic choice, generating so called Ford effect. The first result we present is that in case of CES utility the concentration effect is generically harmful for consumers’ well-being. However, the result may be different for preferences, generating the demand with Variable Elasticity of Substitution (VES). We find the natural assumption on VES utilities, which hold for most of the commonly used classes of utility functions, such as Quadratic, CARA, HARA, etc., which allows to obtain the positive welfare effect, i.e., to justify Schumpeter hypothesis.

AB - The paper studies how the industry concentration affects the Social welfare, which is measured as consumer’s indirect utility. Schumpeterian hypothesis tells that the harmful effect of oligopolization may be offset by positive externalities of concentration, such as innovations in technologies, R&D, etc. This contradicts to traditional neoliberal paradigm, which insists that concentration is always harmful for the end consumers. We study a general equilibrium model with two types of firms and imperfect price competition. Firms of the first type are monopolistic competitors with negligible impact to market statistics, subjected to typical assumptions, e.g., free entry until zero-profit cut-off. Unlike this, the firms of second type assumed to have non-zero impact to market statistics, in particular, to consumer’s income via distribution of non-zero profit across consumers-shareholders. Moreover, these large firms (oligopolies) allow for dependence of profits on their strategic choice, generating so called Ford effect. The first result we present is that in case of CES utility the concentration effect is generically harmful for consumers’ well-being. However, the result may be different for preferences, generating the demand with Variable Elasticity of Substitution (VES). We find the natural assumption on VES utilities, which hold for most of the commonly used classes of utility functions, such as Quadratic, CARA, HARA, etc., which allows to obtain the positive welfare effect, i.e., to justify Schumpeter hypothesis.

KW - Additive preferences

KW - Bertrand competition

KW - Ford effect

KW - Monopolistic competition

KW - Schumpeter hypothesis

UR - http://www.scopus.com/inward/record.url?scp=85073191392&partnerID=8YFLogxK

U2 - 10.1007/978-3-030-23699-1_13

DO - 10.1007/978-3-030-23699-1_13

M3 - Chapter

AN - SCOPUS:85073191392

T3 - Static and Dynamic Game Theory: Foundations and Applications

SP - 245

EP - 266

BT - Static and Dynamic Game Theory

PB - Birkhauser Verlag Basel

ER -